19.

Suppose a linear probability model you have developed finds there are two factors influencing the past bankruptcy behavior of firms: the debt ratio and the profit margin. Based on past bankruptcy experience, the linear probability model is estimated as: PD_i = 0.18 (debt ratio) + 0.35 (profit margin) You know a particular firm has a debt ratio of 35 percent and a probability of default of 8 percent. Calculate the firm's profit margin.

Multiple Choice

• 4.857 percent

• 8.163 percent

• 6.53 percent

• 8.00 percent

18.

A linear probability model you have developed finds there are two factors influencing the past bankruptcy behavior of firms: the equity multiplier and the total asset turnover ratio. Based on past bankruptcy experience, the linear probability model is estimated as: PD_i = 0.04 (equity multiplier) + 0.01 (total asset turnover) A firm has an equity multiplier of 1.5 times and a probability of default of 7 percent. Calculate the firm's total asset turnover ratio.

Multiple Choice

• 1.0

• 4.5

• 0.01

• 2.0

17.

Which of the following is an incorrect priority of claims in the event of liquidation? (Note: The first item would be paid first.)

Multiple Choice

• Secured creditors, wages due employees, unsecured creditor claims, common shareholders

• Secured creditors, unsecured creditor claims, preferred shareholders, common shareholders

• Secured creditors, administration expenses, common shareholders, preferred shareholders

• Secured creditors, wages due employees, taxes due federal government, preferred shareholders